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Papa John’s Announces Third Quarter 2012 Results

Third quarter 2012 income before income taxes was $21.1 million, compared to $16.8 million, or a 25.0% increase. Income before income taxes was $72.4 million for the nine months ended September 23, 2012, compared to $62.7 million, or a 15.5% increase.

Income before income taxes is summarized in the following table on a reporting segment basis (in thousands):
 
      Three Months Ended   Nine Months Ended
    Sept. 23,   Sept. 25,   Increase   Sept. 23,   Sept. 25,   Increase
      2012   2011   (Decrease)   2012   2011   (Decrease)
 

Domestic company-owned restaurants (a)
$ 5,549 $ 4,273 $ 1,276 $ 27,228 $ 22,577 $ 4,651
Domestic commissaries 6,846 7,237 (391 ) 25,990 21,112 4,878
North America franchising 16,070 15,941 129 50,829 50,190 639
International 625 249 376 1,217 (817 ) 2,034
All others 732 (66 ) 798 1,598 (742 ) 2,340
Unallocated corporate expenses (b) (9,007 ) (11,085 ) 2,078 (34,198 ) (29,371 ) (4,827 )

Elimination of intersegment losses (profits)
    242       297       (55 )     (229 )     (256 )     27  
Income before income taxes 21,057 16,846 4,211 72,435 62,693 9,742

Incentive Contribution (income) expense
    (250 )     -       (250 )     3,221       -       3,221  

Income before income taxes, excluding Incentive Contribution
  $ 20,807     $ 16,846     $ 3,961     $ 75,656     $ 62,693     $ 12,963  
 

(a) The nine months ended September 23, 2012 includes the benefit of a $1.0 million advertising credit from the Papa John’s Marketing Fund related to the Incentive Contribution.
 

(b) Includes the impact of the Incentive Contribution in 2012 ($250,000 increase for the three-month period and a $4.3 million reduction for the nine-month period).
 

The increase in income before income taxes for the three months ended September 23, 2012, of $4.0 million is primarily due to the following:
  • Domestic company-owned restaurants income improved approximately $1.3 million primarily due to comparable sales increases as well as favorable commodity costs.
  • North America Franchising and International improved due to the previously mentioned increase in net restaurants and strong comparable sales results.
  • All others improved approximately $800,000 primarily due to an improvement in our eCommerce operations due to higher online sales.
  • Unallocated corporate expenses decreased due to the prior year including higher franchise incentives and a charge of approximately $800,000 related to lease obligations associated with our former Perfect Pizza operations in the United Kingdom, partially offset by higher legal and insurance costs.
  • These increases were partially offset by a decrease in Domestic commissaries operating results of approximately $400,000. The decrease was due to lower margins resulting from lower prices charged to restaurants, slightly offset by increased profits from higher restaurant sales.

The increase in income before income taxes for the nine months ended September 23, 2012, of $13.0 million is primarily due to the following:
  • Domestic company-owned restaurants operating income improved approximately $4.7 million primarily due to comparable sales increases as well as favorable commodity costs.
  • Domestic commissaries income improved approximately $4.9 million primarily due to the increase in net restaurants and comparable sales.
  • North America Franchising and International improved due to the previously mentioned increase in net restaurants and strong comparable sales results.
  • All others improved approximately $2.3 million primarily due to an improvement in our eCommerce operations due to higher online sales.
  • These increases were slightly offset by higher unallocated corporate expenses primarily due to an increase in short-term management incentives, legal and insurance costs and higher costs related to our operators’ conference, partially offset by the prior year including franchise incentives and a charge of approximately $800,000 related to lease obligations associated with our former Perfect Pizza operations in the United Kingdom.

The effective tax rates were 33.8% for both the three and nine months ended September 23, 2012, representing increases of 4.7% and 1.7% from the prior year rates. Our effective income tax rate may fluctuate from quarter to quarter for various reasons, including the settlement or resolution of specific federal and state issues. The prior year included significant favorable tax resolution items.

The company’s free cash flow for the first nine months of 2012 and 2011 was as follows (in thousands):
 
  Sept. 23,   Sept. 25,
2012 2011
 
Net cash provided by operating activities* $ 94,773 $ 87,216
Purchase of property and equipment   (26,425 )   (20,647 )
Free cash flow $ 68,348   $ 66,569  
 
*The increase in net cash provided by operating activities is primarily due to higher operating income and favorable changes in working capital.
 

We define free cash flow as net cash provided by operating activities (from the consolidated statements of cash flows) less the purchase of property and equipment. We view free cash flow as an important measure because it is a factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by accounting principles generally accepted in the United States (“GAAP”) and as a result our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of the company’s performance than the company’s GAAP measures.

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